Is the Bank at Fault?

Some banks release borrowers' money to contractors with little proof that the home under mortgage is actually being built.

Some banks release borrowers’ money
to contractors with little proof that the home
under mortgage is actually being built.

As Florida’s housing boom rolled along, Michael Wood, a medical-equipment salesman from Inverness, read investment books and went to weekend real estate seminars to learn how to cash in. At the seminars, he was approached frequently by mortgage brokers offering loans to help him build a home and flip it. There were always catches, however — a big down payment or interest during the construction period, for example.

Michael Wood owes
Coast Bank some $190,000 that it released to his builder for a home on one lot that is mostly built and another $90,000 for a lot that was never even cleared. Builder Jesse Battle didn’t pay subcontractors and suppliers in the first case, and liens are pouring in. The builder’s bankruptcy and the liens prevent Wood from finishing the home.
[Photo: Jeffrey Camp]

But in late 2004 he got a pitch that “satisfied everything.” A friend who worked for American Mortgage Link of Tampa brought him this deal: Wood would take out a mortgage from Bradenton-based Coast Bank of Florida for a home site and construction loan. He would need no money down; he wouldn’t be responsible for interest during the construction period; and the builder would pay all closing costs. The bank wouldn’t even report the mortgage on Wood’s credit report.

The way Florida’s housing market was going, Wood saw little risk. He felt sure he’d be able to flip the home for tens of thousands more than he paid. “It was strongly suggested that it was going to be 20% to 30% profit and that people were putting homes on the market and selling before construction was even complete.”

In early 2005, Wood signed up to build not one, but two homes, both in North Port. He had so much confidence in his friend that he let him handle everything from choosing the lots to the building plans. He took on more than $400,000 in debt and even started convincing his friends and family to sign up. “I’ve got seven or eight family members in this deal,” Wood says. “My cousin, my best friend and business partner since high school, a guy I was in the Navy with 15 years ago, other close friends and associates.”

But toward the end of 2005, Wood’s heavily mortgaged friends and family members began to harangue him with phone messages. They’d seen little or no construction activity on their lots, yet interest was piling up monthly on their loans. The builder, a relatively small St. Petersburg company called Construction Compliance Inc., had promised in its contracts with the buyers to pay construction interest and closing costs. But their contracts with the banks made clear that if CCI did not, those costs would fall to the borrowers.

In 2006, Construction Compliance finally broke ground on Wood’s first home. By August, it was nearly finished. But then “everything just stopped.” CCI President Jesse Battle abruptly halted construction on Wood’s home and nearly 500 others in November 2006 in the face of a falling real estate market and escalating costs.